UK autumn budget to test Reeves' fiscal resolve - Standard Chartered

Limited options ahead of UK's autumn budget given tight borrowing headroom and political pressures. Government likely wants to wait for accurate OBR estimates as well as economic and political developments before committing to fiscal plans. Tax hikes seem likely as spending cuts are unpopular and Reeves has committed to narrow fiscal rules, Standard Chartered's economists report.

Budget tight, optics tighter

"The UK's autumn budget - to be presented by Chancellor Reeves likely in either October or November - will be very closely watched. The government needs to shore up extremely narrow fiscal headroom, under pressure from skittish Gilt markets in a particularly tough economic and political environment. GDP growth contractions in April and May and higher borrowing costs have squeezed headroom; meanwhile, NATO commitments on defence and U-turns on planned spending cuts significantly limit fiscal-tightening opportunities."

"Prime Minister Starmer recently quashed market rumours that Chancellor Reeves may be replaced in the near future, expressing confidence that she will remain in post "into the next election and for many years after". If this is the case, Reeves' role in the autumn will be to restore fiscal headroom - which looks on track to be negative - by adopting some combination of tax hikes, spending cuts, or fiscal rule changes. Given the unpopularity of significant spending cuts both among the public and Labour backbenchers, as well as Reeves' unwavering commitment to meeting the fiscal rules she set out last October, tax rises appear highly likely."

"The government explicitly ruled out hiking key taxes (including income tax, VAT, national insurance and corporation tax) in its 2024 manifesto but has recently walked back its once-forceful tone in favour of leaving as many options available as possible ahead of the autumn budget. We think that the government has yet to decide its fiscal path and will keep a watchful eye on UK economic indicators, as well as the OBR's assessments of how far it might deviate from its fiscal targets, to inform its eventual decision."